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Economic Outlook: David Smith: Just how low can base rates go?

WHEN Mervyn King joined the Bank of England as a non-executive director in 1990, interest rates in Britain were 15% and there was a serious risk that they would go higher.

Now he has taken over as governor, interest rates are 3.75% — a quarter of their 1990 level — and there is a serious chance that they will go lower. Indeed, King’s own hints last week were taken by the markets as pointing that way.

Had anybody seriously suggested in 1990 that we were facing a future with interest rates in low single figures he would have been thought of as dangerously eccentric. The average base rate for the previous decade was 12%. Excursions into single figures were rare and into low single figures unheard of. But that is where we are, and talk of a 3% rate is by no means fanciful.